Business
Can David Zaslav’s new Warner Bros. Discovery deals work?
Merging is always the easy part. The companies are usually willing to join forces. Bankers and lawyers are incentivized to get the deal done. Plus the media loves a good M&A deal with photo ops of high-fiving CEOs and their grand plans to make history through the process of creative destruction.
But then comes the heavy lifting: Successfully combining two often very different companies with different corporate cultures and creating shareholder value. I’ve been around this business long enough to know that there’s lots of destruction in big-time M&A.
Deals crash and burn at least as much as they pan out, maybe more. And what a racket it is for Wall Street, which gets paid even when their work ultimately produces failure on a monumental scale. David Zaslav’s Warner Bros. Discovery might be the next one to fail for reasons that will soon become apparent.
Consider the once mighty GE, a conglomerate built on theories about how bigger is better. Until it became crystal clear the conglomerate wasn’t living up to its hype and needed to be broken up as shares fell to near penny-stock territory. The bankers who constructed those ugly acquisitions still haven’t spent all the fees they generated on their ill-fated dealmaking.
Then there are the travails of Citigroup. The 1998 mega-deal merged the Travelers Group investment bank and insurance giant with commercial-banking icon Citicorp. It was based on the premise that a financial colossus could make money cross-selling investments and traditional banking products to large institutions and individuals.
In retrospect: Not really. The cultures of the businesses never quite meshed. (Banking king Jamie Dimon was even ousted in the chaos.) The cross-selling “synergies,” as bankers call them, didn’t really materialize either, at least not enough to make up for all the bad stuff.
Citigroup is still with us but only because of the generosity of the federal government and the American taxpayer: It was one of the most bailed-out banks during the 2008 financial crisis.
Mother of all fiascos
Now go back in your history books and look up the AOL Time Warner merger fiasco. For my money, there is probably no greater example of the destruction of shareholder value built upon a mountain of banking fees and failed promises of synergistic coupling than this dumbo combo.
The $165 billion deal was announced with much fanfare in January 2000. It featured high-fiving CEOs and promises to set the world on fire by cross-selling old media (Time Warner’s magazines, cable programs, CNN, HBO, etc.) with new media (AOL’s then-popular Internet portal).
That sounded good amid the irrational exuberance of the online bubble. When the bubble popped, so did the company’s value proposition. Then came the great unwinding of the company’s various assets.
What was left, Time Warner — comprised of HBO, CNN, Warner Bros. Studios, TNT and Turner Sports — was defenestrated in 2016 as well.
The latest sucker, AT&T, bought the company for $85.4 billion, promising shareholders they would make the numbers work by using AT&T’s mobile and broadband distribution to sell Time Warner’s programming (more synergies).
But the telecom geeks at AT&T really never liked the entertainment types at Time Warner (and certainly didn’t understand the business). With shares getting crushed and costs rising, they turned to Wall Street once again, unloading Warner to Zaslav’s Discovery Inc. to create a new media behemoth, Warner Bros. Discovery.
The deal would finally (hopefully) capture those elusive synergies, since Zaslav knows how to make various media properties, in this case scripted and unscripted content — HBOs “Game of Thrones” and Discovery’s Food Network — work as one. Warner Bros. Discovery was also born with the size and scale to compete with Disney and Netflix in the streaming wars, shareholders were told.
Even so, with size comes lots of debt that needs to be slashed. There’s $55 billion worth sitting on Zaslav’s financial statements like a pile of bad scripts. Competition is fierce over its streaming strategy — the alleged future of programming that isn’t making as much money as insiders hope.
And yes, those synergies have been hard to find since Zas — as he’s known in media circles — formally took over the new company earlier this year. That is why his stock has been cratering. Warner Bros. Discovery last week announced a $3.41 billion second-quarter loss.
Swinging a heavy ax
Zaslav is looking for $3 billion in post-deal savings. First to go was the CNN+ streaming service, as these pages reported. A big-budget likely flop, “Batgirl,” a woke reset of the DC superhero series, was canceled before it could lose Zas even more money than the tens of millions already spent. As I was first to report last week, he’s merging his streaming platforms HBO Max and Discovery+. Layoffs will follow.
Of course, it’s too early to put Warner Bros. Discovery in the same bucket as AOL Time Warner and the rest of the failures mentioned above. And it’s hard not to root for Zas — he’s one of the few honest guys also good at his job in this lousy business.
And who knows? Maybe his streaming business might soon pick up. Suffice to say, the company’s bankers couldn’t care less because they will make money either way.
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Business
Families can make a tax-free rollover from 529 plans to Roth individual retirement accounts starting in 2024
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Americans who save for college in 529 plans will soon have a way to rescue unused funds while keeping their tax benefits intact.
A $1.7 trillion government funding package has a provision that lets savers roll money from 529 plans to Roth individual retirement accounts free of income tax or tax penalties.
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The House passed the measure Friday and the Senate did so Thursday. The bill heads to President Biden, who’s expected to sign it into law.
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The rollover measure — which takes effect in 2024 — has some limitations. Among the largest: There’s a $35,000 lifetime cap on transfers.
“It’s a good provision for people who have [529 accounts] and the money hasn’t been used,” said Ed Slott, a certified public accountant and IRA expert based in Rockville Centre, New York.
That might happen if a beneficiary — such as a child or grandchild — doesn’t attend a college, university, vocational or private K-12 school, or other qualifying institution, for example. Or, a student may receive scholarships that mean some 529 funds are left over.
Millions of 529 accounts hold billions in savings
There were nearly 15 million 529 accounts at the end of last year, holding a total $480 billion, according to the Investment Company Institute. That’s an average of about $30,600 per account.
529 plans carry tax advantages for college savers. Namely, investment earnings on account contributions grow tax-free and aren’t taxable if used for qualifying education expenses like tuition, fees, books, and room and board.
However, that investment growth is generally subject to income tax and a 10% tax penalty if used for an ineligible expense.
This is where rollovers to a Roth IRA can benefit savers with stranded 529 money. A transfer would skirt income tax and penalties; investments would keep growing tax-free in a Roth account, and future retirement withdrawals would also be tax-free.
Some think it’s a handout for the rich
However, some critics think the rollover policy largely amounts to a tax handout to wealthier families.
“You’re giving savings incentives to those who can save and leaving behind those who cannot save,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
A 2012 analysis conducted by the Government Accountability Office found the typical American with a 529 account had “much more wealth” than someone without: $413,500 in total wealth for the median person, about 25 times the amount of a non-accountholder.
You’re giving savings incentives to those who can save and leaving behind those who cannot save.
Steve Rosenthal
senior fellow at the Urban-Brookings Tax Policy Center
Further, the typical owner had a roughly $142,000 annual income versus $45,000 for other families, the GAO report said. Almost half, 47%, had incomes over $150,000.
The new 529-to-Roth IRA transfer provision doesn’t carry income limits.
Limitations on 529-to-IRA transfers
While the new tax break primarily benefits wealthier families, there are “pretty significant” limitations on the rollovers that reduce the financial benefit, Jeffrey Levine, a certified financial planner and certified public accountant based in St. Louis, said in a tweet.
The restrictions include:
- A $35,000 lifetime cap on transfers.
- Rollovers are subject to the annual Roth IRA contribution limit. (The limit is $6,500 in 2023.)
- The rollover can only be made to the beneficiary’s Roth IRA — not that of the account owner. (In other words, a 529 owned by a parent with the child as beneficiary would need to be rolled into the child’s IRA, not the parent’s.)
- The 529 account must have been open for at least 15 years. (It seems changing account beneficiaries may restart that 15-year clock, Levine said.)
- Accountholders can’t roll over contributions, or earnings on those contributions, made in the last five years.
In a summary document, the Senate Finance Committee said current 529 tax rules have “led to hesitating, delaying, or declining to fund 529s to levels needed to pay for the rising costs of education.”
“Families who sacrifice and save in 529 accounts should not be punished with tax and penalty years later if the beneficiary has found an alternative way to pay for their education,” it said.
Are 529 plans already flexible enough?
Some education savings experts think 529 accounts have adequate flexibility so as not to deter families from using them.
For example, owners with leftover account funds can change beneficiaries to another qualifying family member — thereby helping avoid a tax penalty for non-qualified withdrawals. Aside from a kid or grandkid, that family member might be you; a spouse; a son, daughter, brother, sister, father or mother-in-law; sibling or step-sibling; first cousin or their spouse; a niece, nephew or their spouse; or aunt and uncle, among others.
Owners can also keep funds in an account for a beneficiary’s graduate schooling or the education of a future grandchild, according to Savingforcollege.com. Funds can also be used to make up to $10,000 of student loan payments.
The tax penalty may also not be quite as bad as some think, according to education expert Mark Kantrowitz. For example, taxes are assessed at the beneficiary’s income-tax rate, which is generally lower than the parent’s tax rate by at least 10 percentage points.
In that case, the parent “is no worse off than they would have been had they saved in a taxable account,” depending on their tax rates on long-term capital gains, he said.
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The knives are out for Goldman Sachs CEO David Solomon, and this time the people brandishing them aren’t the usual suspects — his junior staffers annoyed that they have to work late or come into the office several times a week.
Solomon’s problems are more serious and existential, I am told, and how he handles what can best be described as a revolt in some quarters of Goldman’s middle and upper management ranks could determine how much longer he stays in his job.
Solomon, 60, took the job in 2018 and was always somewhat of an odd choice to run the white-shoe investment bank that usually cultivated its leaders from within. He cut his teeth at a decidedly un-Goldman-like venue: the scrappy investment bank Bear Stearns (ultimately one of the causalities of the 2008 financial crisis).
He joined Goldman in 1999, as a partner, no less, because his deal-making chops allowed him to skip layers of management.
In other words, Solomon is an outsider at a firm with a wickedly insular culture. He has a quirky side gig as a DJ in the summer Hamptons party circuit. He’s also not one for small talk, and doesn’t consult with a lot of people before handing down his edicts.
“He doesn’t breed a lot of love,” said one former Goldman executive who knows Solomon well.
Lots of people at Goldman don’t like him, and they’re letting their views be heard both internally and with pals at rival firms.
For the record: I’ve met Solomon and like him for his no-BS style. And until pretty recently, the numbers show him doing a great job. Goldman was running on all cylinders in deals and trading. Even as the market corrects, shares are up about 60% since Solomon took over as CEO in 2018 compared to around a 44% rise in the S&P during that time.
Goldman is still the top M&A shop, even widening its market share over rivals in that important business line. Solomon was the first among his fellow CEOs to see the downturn and enact significant layoffs to cut costs.
Still, the grumbling about Solomon is spreading to the managing director and partner class. High-priced Wall Street talent don’t call all the shots at any firm, of course. But Goldman’s MDs and partners have historically been a powerful force when the board decides the fate of current management, which makes Solomon’s hold on his job increasingly precarious as more and more of them defect from his camp.
Here’s how they’re building a case against him: Goldman’s longtime archrival investment bank Morgan Stanley now easily dwarfs Goldman in market value, $144 billion to $116 billion, continuing a trend that predates Solomon. That comes amid a slowdown in banking deals, Goldman’s bread-and-butter business, and Solomon’s home turf.
Morgan’s CEO James Gorman deftly expanded the firm’s wealth management operations, which provide steady revenues. Solomon’s effort to diversify was an overindulgence in something called Marcus, a digital retail bank launched by his predecessor Lloyd Bankfein that Solomon made his baby. So far, it’s been a disaster, so much so that Solomon has been forced to scale back, possibly on the way to winding it down.
Goldman, meanwhile, has missed targets in its recent earnings announcements, and more downward surprises could be in store as markets continue to wobble. Bonuses are down, in some places cut in half, albeit from the nosebleed levels of 2021.
Traders did well in 2022 because Goldman’s are particularly adept in profiting off turbulence, but part of their pool is being diverted to bankers to keep them in-house until the deal slowdown ends.
Since Solomon is a banker, he’s also being accused of favoritism, which in truth is a pretty lame charge, since bankers often subsidize trader bonuses when the markets aren’t profitable. Still, the Goldman trading department is powerful and can spark management change, as it has done in the past.
There’s also a question about Solomon’s allegiance to Goldman’s stand-alone culture. In its 153-year existence, Goldman has operated on the assumption that it would be the acquirer in any major strategic acquisition. Solomon’s experience at Bear, then one of the most transactional places on Wall Street, means he could be looking for a deal and not one that keeps Goldman in charge.
At a time when most Goldman insiders believe he needs to do a “transformational deal,” i.e., something big that allows it to better compete against Morgan Stanley and super banks like JP Morgan, there is speculation that Solomon might allow Goldman to be swallowed whole by, say, a big asset manager or bank if the price was right.
As best I can tell, this grumbling, though real, doesn’t immediately threaten Solomon’s job. Then again, there is something to be said for keeping your producers happy.
Jack Welch, the legendary CEO of General Electric, was a notorious screamer and demanding beyond belief. Yet Welch knew how to nurture his people.
“Jack could chew your ass, then put his arm around you and make you feel great,” one of his longtime executives, Bob Nardelli, once told me.
It’s why so many other talented execs chose to stay around under Welch, abuse and all, and left when his successor took over, watching GE implode from the outside.
Maybe it’s a good time for Solomon to take a page from Welch and start hugging it out.
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